Extended warranties and paying for peace of mind

Extended warranties are often characterized as a form of insurance. Most consumer advocates consider them a bad investment. Does paying for an extended warranty ever make sense, or are they false comfort?

Extended warranties are often characterized as a form of insurance. Most consumer advocates consider them a bad investment. Does paying for an extended warranty ever make sense, or are they false comfort?

—————————————————————————————————————————————————————————-

Last night, the battery cover latch for my BlackBerry Pearl fell out of the phone's housing. After crawling around on the floor for a few minutes, looking for a spring that was smaller than a grain of rice, I began to panic. I've come to really depend on my Blackberry, and I can't imagine being without it. Worried that my phone was going to continue to fall apart, I started to regret not purchasing handset protection from my carrier. This was a completely crazy notion. In my defense, I was under duress, and I quickly came to my senses.

I didn't buy the protection plan for the phone when I signed up with this carrier a year and a half ago. At that time, when my head was clear, I figured that the additional cost wouldn't make sense in the long run. I was completely right about that.

To cover my BlackBerry Pearl under the carrier's handset protection plan would have cost me $119.80 to date ($5.99 a month for the premium, over 20 months). To file a claim under the damage protection plan, I would be obligated to pay a $110.00 deductible on the policy. So, if I had decided to go for my carrier's handset coverage, I would have paid $229.80 to get a refurbished phone.

Yup, you read that right. A deductible. For a phone.

Not a very good deal, considering I paid $99.00 for my BlackBerry, new.

In spite of their cost, the fact that people still buy extended warranties should come as no surprise to us. Many consumers are risk averse, and they worry about losing on their investments. Remember the sunk cost bias? It often seems that a small investment to protect a larger expenditure could be a good idea. It's that idea of easy supplemental protection that lulls people into buying extended hardware warranties.

I've found, at least in my work, that warranties are most attractive to the small operator. Large organizations buy so many machines that the cost of insuring individual pieces of hardware against failure doesn't make fiscal sense. The bigger companies also often have existing arrangements for IT support, so they don't need access to the call center or the on-site services that some manufacturers offer with their plans. Small shops that don't have support capacity built-in seem to hope that extended warranty coverage will protect them from needing to contract for professional IT services later. There have been a few occasions where I've bought extended warranties for clients. Usually it was because they asked for them. Sometimes it has even felt like they were purchasing extended service plans so they wouldn't feel locked into needing my help down the line.

Do extended service warranties have any real benefit to the enterprise? Who forms the target market for these products? Let me know what you think in the comments.